Turkey crisis: seven fund manager reactions

With investors losing faith in the willingness or ability of the Turkish government to respond to their concerns over inflation and deteriorating relations with the US, the country's currency fell into crisis last week.

After losing 22.2% of its value against the dollar between last Thursday and Monday, the lira rebounded over 7% this morning.

As Turkey's foreign exchange volatility continues, we share the views of seven fund managers on what the future holds.

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Paul McNamara

Investment director, GAM

'Turkey has a toxic combination of a weak external position (current account deficit), excessive private sector debt and a high level of foreign funding in the banking system.

'This is coming to a head as a much-needed demand slowdown is causing asset quality problems in the banks. The role of construction in the economy for example is comparable with that in Spain or Ireland ahead of the European bust.

'The Turks have exhausted the possibilities of rate hikes, and are backed into a corner by their inadequate level of currency reserves (the IMF thinks that Turkey has the least adequate level of reserves of the major EM economies).

'Our strongly-held negative view on Turkey remains intact and we have not covered any risk.'

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Lucas Irisik

Portfolio manager, Nikko Asset Management

'Tightening grip over dissidents and “unfriendly” media, coupled with an accommodative stance of both fiscal and monetary policy aimed at boosting Turks’ prosperity and in turn Erdogan’s popularity, was orchestrated to deliver a crushing victory in the upcoming presidential and parliamentary elections in 2019.

'Recent changes to the central bank charter, with respect to personal appointments, are set to further undermine the institution’s strength and credibility by making it even more susceptible to political pressure.

'We fear that an environment of heightened risk premia in Turkish assets is unlikely to abate any time soon, with heightened volatility in both bond and currency markets.

'In this stagflationary environment, banks’ asset quality is also likely to deteriorate, but given the relative strength of the sector, the risk to financial stability ought to be contained, hence a credit crisis should be avoided.'

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Emre Akcakmak

Portfolio adviser, East Capital

'What we experienced on August 10 may be best called a crisis of confidence.

'President Erdogan’s impulsive comments on the currency created exactly the opposite effect, leading to the lira experiencing its second worst day in 25 years.

'We, along with several other long term investors, will be waiting for the crisis of confidence to be defeated with a well-formulated, decisively implemented economic policy.

'Neither foreign nor local investors welcome the “populistic rhetoric but pragmatic action” equation, especially when the action diverges away from being pragmatic as far as economic policies are concerned.'

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Damien Buchet

Head of total return strategy, Finisterre Capital

'Although the starting point in external indebtedness looked manageable, the acceleration of currency weakness and local interest rates has led to market worries over debt dynamics sustainability, as reflected in an inversion of both the external and local debt curves.

'Policy reaction over the past three months has been focused on monetary policy – liquidity tightening and rates hikes – but was often late and lower than expected.

'In many ways Turkey still controls its destiny at this point, and a credible policy inflection now would likely put an end to the negative feedback loop. But timing is of the essence.

'A continuation of the policy status quo will create more pressure on the banking and corporate sectors, via currency depreciation and the need to refinance external credit lines.'

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Emiel van den Heiligenberg

Head of asset allocation, Legal & General Investment Management

'With the lira in free-fall, what might the catalyst be for currency support?

'We think risks are now two-sided as the vast majority of the market is bearish on Turkey, while short positions pay a significant negative carry.

'Furthermore, diplomatic relationships could improve, and Erdogan could bow to pressure from small businesses (who are key supporters and suffering from currency weakness) and become more market-friendly.

'We have been dipping our toe in to the Turkish lira and built up a small long position on Friday.'

Leave a comment!

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With investors losing faith in the willingness or ability of the Turkish government to respond to their concerns over inflation and deteriorating relations with the US, the country's currency fell into crisis last week.

After losing 22.2% of its value against the dollar between last Thursday and Monday, the lira rebounded over 7% this morning.

As Turkey's foreign exchange volatility continues, we share the views of seven fund managers on what the future holds.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

With investors losing faith in the willingness or ability of the Turkish government to respond to their concerns over inflation and deteriorating relations with the US, the country's currency fell into crisis last week.

After losing 22.2% of its value against the dollar between last Thursday and Monday, the lira rebounded over 7% this morning.

As Turkey's foreign exchange volatility continues, we share the views of seven fund managers on what the future holds.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Paul McNamara

Investment director, GAM

'Turkey has a toxic combination of a weak external position (current account deficit), excessive private sector debt and a high level of foreign funding in the banking system.

'This is coming to a head as a much-needed demand slowdown is causing asset quality problems in the banks. The role of construction in the economy for example is comparable with that in Spain or Ireland ahead of the European bust.

'The Turks have exhausted the possibilities of rate hikes, and are backed into a corner by their inadequate level of currency reserves (the IMF thinks that Turkey has the least adequate level of reserves of the major EM economies).

'Our strongly-held negative view on Turkey remains intact and we have not covered any risk.'

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Lucas Irisik

Portfolio manager, Nikko Asset Management

'Tightening grip over dissidents and “unfriendly” media, coupled with an accommodative stance of both fiscal and monetary policy aimed at boosting Turks’ prosperity and in turn Erdogan’s popularity, was orchestrated to deliver a crushing victory in the upcoming presidential and parliamentary elections in 2019.

'Recent changes to the central bank charter, with respect to personal appointments, are set to further undermine the institution’s strength and credibility by making it even more susceptible to political pressure.

'We fear that an environment of heightened risk premia in Turkish assets is unlikely to abate any time soon, with heightened volatility in both bond and currency markets.

'In this stagflationary environment, banks’ asset quality is also likely to deteriorate, but given the relative strength of the sector, the risk to financial stability ought to be contained, hence a credit crisis should be avoided.'

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Leave a comment!

Emre Akcakmak

Portfolio adviser, East Capital

'What we experienced on August 10 may be best called a crisis of confidence.

'President Erdogan’s impulsive comments on the currency created exactly the opposite effect, leading to the lira experiencing its second worst day in 25 years.

'We, along with several other long term investors, will be waiting for the crisis of confidence to be defeated with a well-formulated, decisively implemented economic policy.

'Neither foreign nor local investors welcome the “populistic rhetoric but pragmatic action” equation, especially when the action diverges away from being pragmatic as far as economic policies are concerned.'

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Damien Buchet

Head of total return strategy, Finisterre Capital

'Although the starting point in external indebtedness looked manageable, the acceleration of currency weakness and local interest rates has led to market worries over debt dynamics sustainability, as reflected in an inversion of both the external and local debt curves.

'Policy reaction over the past three months has been focused on monetary policy – liquidity tightening and rates hikes – but was often late and lower than expected.

'In many ways Turkey still controls its destiny at this point, and a credible policy inflection now would likely put an end to the negative feedback loop. But timing is of the essence.

'A continuation of the policy status quo will create more pressure on the banking and corporate sectors, via currency depreciation and the need to refinance external credit lines.'

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Emiel van den Heiligenberg

Head of asset allocation, Legal & General Investment Management

'With the lira in free-fall, what might the catalyst be for currency support?

'We think risks are now two-sided as the vast majority of the market is bearish on Turkey, while short positions pay a significant negative carry.

'Furthermore, diplomatic relationships could improve, and Erdogan could bow to pressure from small businesses (who are key supporters and suffering from currency weakness) and become more market-friendly.

'We have been dipping our toe in to the Turkish lira and built up a small long position on Friday.'

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

In the final part of our interview with Paul Feeney, the Quilter chief executive declares that the government has 'left the ring' on savings policy, rounds on robo-advice, and reveals his own experience of the DB transfer market.

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